Alibaba's next challenge is managing growth: WSJ

BEIJING--After wresting control of his company's boardroom in a battle with Yahoo Inc., the founder of Alibaba Group says he is focused now on a bigger challenge: managing runaway growth at the Chinese e-commerce giant.

"We don't have any experience. We don't know how to organize," Jack Ma said in an interview.

The pace of growth threatens to overwhelm Alibaba, which Mr. Ma, a former English teacher, started in his apartment 13 years ago. Today, Hangzhou-based Alibaba has more than 23,000 employees. Taobao and Tmall, the company's shopping websites, are expected to host a trillion yuan ($157 billion) in transactions this year, up 150% from 400 billion yuan in 2010. Taobao and Tmall are each less than 10 years old.

One of the most serious questions for Mr. Ma is whether China's infrastructure can handle the growing number of parcels flooding the country's streets everyday.

Compared with the U.S., Japan and Europe, logistics infrastructure in China is "terrible," Mr. Ma said. China is likely to exceed $785.6 billion in annual online retail sales in five to 10 years, he predicted. That is "at least one to two times Wal-Mart [Inc.]'s global sales," he added. "What's stopping it? Logistics."

He also worries that Alibaba's growth will hinder the company's ability to make decisions quickly in China's fast-changing market. "As CEO, when everybody sees good things, I have to see bad things."

Alibaba has emerged from a tough year, including a fraud scandal involving some of its employees; a dispute with Yahoo over ownership of online payment company Alipay, now controlled by a separate company owned by Mr. Ma; and protests from users over increased fees. All this has led many people, including users and prominent Chinese journalists, to question the altruistic image Mr. Ma likes to project.

"I've grown up 10 years, mentally. And I now know how to deal with these things in a much better way," Mr. Ma said. "You don't expect everybody to understand you. It's unrealistic. But 20, 30 years later, people will understand what we did. And this is called leadership."

Mr. Ma pointed to two of the first steps to address Alibaba's wider challenges: the company's recent move to privatize Alibaba.com Ltd. (ALBIY, 1688.HK), a website listed in Hong Kong that connects buyers around the world with Chinese manufacturers; and a deal announced in May for Alibaba to buy back as much as half of Yahoo's roughly 40% stake in the Chinese company. Alibaba will raise the money for the buyback from other investors.

Executives needed more freedom to make business decisions, Mr. Ma said. He added that a diversified ownership gives Alibaba a "long, sustainable and healthy shareholder structure."

Mr. Ma is now in the midst of seeing Alibaba through a reorganization announced last year in which he split the company's domestic consumer-shopping business into three different units "because we were too slow." Taobao was "one huge group," he said. The decisions that needed to be made for the different parts of its business "were all different, and if you wait for the one guy to make decisions, it's too late. So we had to separate, make sure they moved faster."

Taobao and Tmall are doing well individually, analysts say. Taobao's flagship business is an eBay.com-like site that caters largely to small merchants selling price-competitive, largely nonbranded goods and novelties. Tmall hosts online storefronts for branded products, including Gap Inc. of the U.S. and the Uniqlo arm of Japan's Fast Retailing Co.

Mr. Ma expects transactions at Taobao and Tmall to exceed a trillion yuan this year, or more than two times the value of transactions across all of eBay's online marketplaces in 2011, excluding purchases of vehicles.

Alibaba Chief Financial Officer Joe Tsai said Thursday that Taobao, which earns its revenue from advertising and other value-added services, and Tmall, which earns commissions from its merchants, collectively earned about $1.8 billion in revenue last year, and are likely to experience "very robust" growth in 2012, consistent with the rest of China's e-commerce industry. He added that, unlike other Chinese e-commerce companies, which analysts say have single-digit profit margins, Taobao and Tmall both have margins of more than 50%.

"Most companies, when they're doing good, they enjoy today's wonderful life. They don't worry about five years later-but I worry about five years later," said Mr. Ma. "When we have power, the luxury of beautiful sunshine, let's fix the roof."

Taobao and Tmall also face growing competition for users from e-commerce companies such as Tencent Holdings Ltd.'s Paipai and Beijing Jingdong Century Trading Co.'s 360buy.com. In addition, they are challenged by brick-and-mortar businesses such as Gome Electrical Appliances Holding Ltd. and Suning Appliance Co., which recently introduced e-commerce sites.

Research firm Analysys International says Taobao and Tmall had 70.8% of all online transactions in China in the first quarter of this year but that their share is declining slightly each quarter. Some online shopping sites actually own storefronts on Alibaba's Tmall.

Mr. Ma, who frequently quotes Chinese philosophers, said he is undaunted by rival e-commerce models. "Ninety-nine percent of them are American e-commerce copycats," he said. They are "too late," he added.

The entrepreneur, who started Alibaba without a background in business or technology, is seen as a role model for Chinese small-business owners. Many flock to Hangzhou to hear him speak at Alibaba's annual Alifest conference for customers and media.

Mr. Ma makes most of his speeches dressed as he appeared on Thursday, in a plain polo shirt and Chinese peasant-style cloth shoes--a nod to his desire to show he hasn't changed since Alibaba's early days. Mr. Ma said he is loathe to hear people refer to his business as an empire.

"I did not change my entrepreneurial spirit, and I did not change my idealism," he said.

But Mr. Ma still shows off his success in other ways, such as by appearing with celebrities including NBA star Kobe Bryant, who attended Alifest in 2009, and former U.S. President Bill Clinton. His interview with The Wall Street Journal in Beijing took place in a Park Hyatt Hotel conference room elaborately decorated in gold tones, reserved for the China Entrepreneur Club, a nonprofit organization of China's 50 most influential business leaders. Other members of the club include Wang Shi, chairman of China Vanke Co., China's biggest property developer, and Li Shufu, chairman of Zhejiang Geely Holding Group Co., which owns Volvo Cars.

Mr. Ma, 47 years old, says he has stepped back from day-to-day operations and is cultivating a new generation of leaders for Alibaba Group, adding that after multiple failed retirement attempts, he realized the need to prepare younger executives for serious challenges. "Years ago, I made a lot of decisions myself. This year, I make them make decisions," he said, referring to the nine executives who lead Alibaba's various business units. Mr. Ma said he hasn't been to the office in more than two months. "I'm answering less and less e-mails. Of 100 e-mails I receive, I only answer one or two, and I answer in less than three sentences. Most of the time, it's only [a few] words: 'What do you think?' " he said.

Mr. Ma said he remains close to Alibaba, but more as a mentor to a workforce with an average age of 26.

He still has ambitions for Taobao to compete globally.

"I cannot say exactly how we're going to [compete globally], but definitely we're going to do it," he said, pointing out that there are far fewer differences among young consumers, enabling Internet companies to become more international. "If we cannot do something like Google, Facebook, Amazon, Microsoft or IBM, I will regret it."

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